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capital. The risk-free interest rate is 4%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? b. Suppose instead the firm makes interest payments of $1,900 per year. What is the value of equity? What is the value of debt? c. What is the difference between the total value of the firm with leverage and without leverage? d. To what percentage of the value of the debt is the difference in part (c) equal? a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? If the firm has no debt and pays out its net income as a dividend each year, the value of the firm's equity is $ (Round to the nearest dollar.) b. Suppose instead the firm makes interest payments of $1,900 per year. What is the value of equity? What is the value of debt? If the firm makes interest payments of $1,900 per year, the value of equity is $ (Round to the nearest dollar.) If the firm makes interest payments of $1,900 per year, the value of debt is $ (Round to the nearest dollar.) c. What is the difference between the total value of the firm with leverage and without leverage? The difference between the total value of the firm with leverage and without leverage is $ (Round to the nearest dollar.) d. To what percentage of the value of the debt is the difference in part (c) equal? The percentage of the value of debt to the difference in part (c) is %. (Round to the nearest whole percent.) The risk-free interest rate is 9%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? b. Suppose instead the firm makes interest payments of $1,500 per year. What is the value of equity? What is the value of debt? c. What is the difference between the total value of the firm with leverage and without leverage? d. To what percentage of the value of the debt is the difference in part (c) equal? a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? To find the value of the unlevered firm we must first find the net income using the following formula: Net Income =EB/T - Interest Expense - Taxes Therefore, NetIncome=$5,500(137%)=$3,465 The value of the net income of the no-debt firm is $3,465. Then, to find the value of the equity, use the following formula: EquityValue=CostofCapitalExpectedCashFlow where the expected cash flow each year is the net income found above and the cost of capital is the risk-free rate. Therefore, EquityValue=9%$3,465=$38,500 If the firm has no debt and pays out its net income as a dividend each year, the value of the firm's equity is $38,500. c. What is the difference between the total value of the firm with leverage and without leverage? Suppose instead the firm makes interest payments of $1,500 per year. What is the value of equity? What is the value of debt? To find the value of the levered firm we must first find the net income using the following formula: Net Income =EB/T Interest Expense - Taxes Therefore, NetIncome=($5,5001,500)(137%)=$2,520 The value of the net income if the firm makes interest payments of $1,500 is $2,520. Then, to find the value of the equity, use the following formula: EquityValue=CostofCapitalExpectedCashFlow where the expected cash flow each year is the net income found above and the cost of capital is the risk-free rate. Therefore EquityValue=9%$2,520=$28,000 If the firm makes interest payments of $1,500 per year, the value of equity is $28,000. We next need to find the value of the debt. Since we know: Interest Payment = Debt Interest rate To determine the value of debt, D, use the following formula: D=Risk-freeRate%InterestPayment Therefore, D=9%$1,500=16,667 If the firm makes interest payments of $1,500 per year, the value of debt is $16,667. d. To what percentage of the value of the debt is the difference in part (c) equal? To find the value of the firm with leverage, use the following formula: VL=E+D Therefore, VL=$28,000+$16,667=$44,667 The value of the firm with leverage is $44,667. To find the value of the firm without leverage, in the value of the unlevered equity found in part (a), therefore the value of the firm without leverage is $38,500. To find the difference between the total value of the firm with leverage and without leverage, use the following formula: Difference=VLVU Therefore, Difference=$44,667$38,500=$6,167 The difference between the total value of the firm with leverage and without leverage is $6,167. To find the percentage of the value of the debt to the difference in part (c), divide the difference by the value of debt. Percentage=$16,667$6,167=37% The percentage of the value of debt to the difference in (c) is 37%. capital. The risk-free interest rate is 4%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? b. Suppose instead the firm makes interest payments of $1,900 per year. What is the value of equity? What is the value of debt? c. What is the difference between the total value of the firm with leverage and without leverage? d. To what percentage of the value of the debt is the difference in part (c) equal? a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? If the firm has no debt and pays out its net income as a dividend each year, the value of the firm's equity is $ (Round to the nearest dollar.) b. Suppose instead the firm makes interest payments of $1,900 per year. What is the value of equity? What is the value of debt? If the firm makes interest payments of $1,900 per year, the value of equity is $ (Round to the nearest dollar.) If the firm makes interest payments of $1,900 per year, the value of debt is $ (Round to the nearest dollar.) c. What is the difference between the total value of the firm with leverage and without leverage? The difference between the total value of the firm with leverage and without leverage is $ (Round to the nearest dollar.) d. To what percentage of the value of the debt is the difference in part (c) equal? The percentage of the value of debt to the difference in part (c) is %. (Round to the nearest whole percent.) The risk-free interest rate is 9%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? b. Suppose instead the firm makes interest payments of $1,500 per year. What is the value of equity? What is the value of debt? c. What is the difference between the total value of the firm with leverage and without leverage? d. To what percentage of the value of the debt is the difference in part (c) equal? a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? To find the value of the unlevered firm we must first find the net income using the following formula: Net Income =EB/T - Interest Expense - Taxes Therefore, NetIncome=$5,500(137%)=$3,465 The value of the net income of the no-debt firm is $3,465. Then, to find the value of the equity, use the following formula: EquityValue=CostofCapitalExpectedCashFlow where the expected cash flow each year is the net income found above and the cost of capital is the risk-free rate. Therefore, EquityValue=9%$3,465=$38,500 If the firm has no debt and pays out its net income as a dividend each year, the value of the firm's equity is $38,500. c. What is the difference between the total value of the firm with leverage and without leverage? Suppose instead the firm makes interest payments of $1,500 per year. What is the value of equity? What is the value of debt? To find the value of the levered firm we must first find the net income using the following formula: Net Income =EB/T Interest Expense - Taxes Therefore, NetIncome=($5,5001,500)(137%)=$2,520 The value of the net income if the firm makes interest payments of $1,500 is $2,520. Then, to find the value of the equity, use the following formula: EquityValue=CostofCapitalExpectedCashFlow where the expected cash flow each year is the net income found above and the cost of capital is the risk-free rate. Therefore EquityValue=9%$2,520=$28,000 If the firm makes interest payments of $1,500 per year, the value of equity is $28,000. We next need to find the value of the debt. Since we know: Interest Payment = Debt Interest rate To determine the value of debt, D, use the following formula: D=Risk-freeRate%InterestPayment Therefore, D=9%$1,500=16,667 If the firm makes interest payments of $1,500 per year, the value of debt is $16,667. d. To what percentage of the value of the debt is the difference in part (c) equal? To find the value of the firm with leverage, use the following formula: VL=E+D Therefore, VL=$28,000+$16,667=$44,667 The value of the firm with leverage is $44,667. To find the value of the firm without leverage, in the value of the unlevered equity found in part (a), therefore the value of the firm without leverage is $38,500. To find the difference between the total value of the firm with leverage and without leverage, use the following formula: Difference=VLVU Therefore, Difference=$44,667$38,500=$6,167 The difference between the total value of the firm with leverage and without leverage is $6,167. To find the percentage of the value of the debt to the difference in part (c), divide the difference by the value of debt. Percentage=$16,667$6,167=37% The percentage of the value of debt to the difference in (c) is 37%